Seeing is Believing

If you've ever had the opportunity to chat with a professional trader, you will find one thing in common: all of them have an edge based on low risk trading. After all seeing is believing and there are so many unreal things in the world such as the imaginary forex profits.

With all complexities and random components of the modern forex trading the first thing that a forex beginner must learn before trading with some level of confidence is the detection of low risk entries, those offering the largest profit for the least amount of loss potential. What is the definition of a low risk entry? We can define it as the price level where a trader can risk the smallest portion of his account to prove whether his edge will work.

Many of such entries can be detected looking at inflection points on the price chart. The inflection points can be found by looking for those levels where there was a definite change of direction.

It turns out that the more powerful is the reversal, the more important that point becomes on the retest. The Figure below displays some of these turning points. Note that the first time these levels were "tested," not only did they provide low risk trade setup, but they also held, and reversed.

The next Figure uses a 60-period EMA as the active trend. This is coupled with the support and resistance evaluation and we use the resistance level as the "line in the sand". The breaching of these is a clear signal of a change of the trend providing the entry, and the buy stop. Depending on how much risk one acceptable, a limit order can be placed close to that price.

The next example shows how the TF (E-mini Russell 2000) has pierced through the lower Keltner band ( the Keltner band is similar to the Bollinger Bands and Envelopes). This is a signal of an extended market where the possibility of reversals has been increased. To the right, we see two preceding inflection points. These would be deemed support areas that should attract buyers. These situation indicates low risk areas to place orders.

The last Figure illustrates a real low risk. The grounds behind this trade were that the ES had been trending higher, but in a broken up fashion. The price point highlighted was the major low, which had to be sustained if the buyers were to preserve control. In the chart of the ES (E-mini S&P) the magenta-colored line is the last boundary. The entry is done above, with a snug stop just below that spot. The trade was exited on the close of the regular session.

Suffice it to say, not all trades did as nice as these, but the most important point here is when they don't pan out, the losses will be negligible compared to the profit potential.

If the forex beginner learns the skill of detecting these levels, the biggest challenge is putting on the trades. If you look closely at all the charts, you were buying into a series of red candles or shorting into a sequence of green candles (some of them very tall). Psychologically, this doesn't sit well with most non-professional traders. Only by knowing probabilities and accepting risk can a trader place these trades with self-assurance.

The other important point is patience. These above situation don't come every second. However they may appear two or three times a day (maybe). This is where the phrase "if you can't see it do not do it " becomes applicable. You may practice different strategies but regardless of your trading method, the low risk entries are the key points of a consistently profitable trader.